What does the Zee merger with Sony mean?

A few days after Zee Entertainment investors tried to oust Punit Goenka from the top job at the company, Zee has announced a strategic merger deal with Sony Pictures Network India Ltd. The combined entity created through the merger of Zee Entertainment and Sony Pictures will have a combined market cap of Rs.50,000 crore to begin with.

How will the ZEE - Sony merger be structured?

While Zee Entertainment is still struggling for cash to bankroll its expansion plans, the merger with Sony Pictures will give the combined entity greater access to cash flows and capital heft. Currently, as per the relative valuation ratios, Zee should have a stake of around 61.25% in the merged entity. However, it is Sony Pictures that will bring in the much needed cash into the combined venture. In fact, Sony will bring with it an assurance that the merged entity will have a cash chest of at least $1.5-1.6 billion or Rs.11,000-12,000 crore.

As a result, Sony Pictures will get a larger 52.93% share in the combined entity. The balance 47.07% stake will be held by Zee Entertainment. Since Zee Entertainment will cease to exist as an independent entity, the shareholders of Zee will  be issued shares of the merged entity on a proportionate basis. Sony Pictures will be the majority partner in the merged entity. 

Progress on the ZEE - Sony merger deal so far

As of now only the approximate ratios are worked out and the term sheets have been exchanged and agreed upon. There are bigger challenges like approval from the two boards, convening of an EGM to get the approval of minority shareholders; including institutional shareholders etc. For Zee, the merger will not only be based on the financial heft that Sony brings to the table but also on the strategic advantages of reach and eyeballs.

As of now, the shareholders of Zee and Sony Picture have entered into a non-binding term sheet. As per the term sheet, they will combine their linear networks, digital assets, production operations and program libraries to create a common pool with greater synergies. There will be a time limit of 90 days within which both Zee and Sony Pictures will conduct due diligence of each other through data rooms.

Since Zee is a listed entity, the deal will require the approval of the stock exchanges and SEBI. Since both the channels come under the Ministry of Information and Broadcasting, the approval of the ministry will also be mandatory. In addition, since it is a combination that will consolidate market share, the approval of the Competition Commission of India (CCI) will also be required.

Both Zee and Sony Pictures believe that the merger will be value accretive for the combined entity. The stock of Zee Entertainment has already rallied more than 70% in the last one week. Zee has advantages like expertise in content creation, regional bouquet of quality content and deep consumer connect over 30 years. Sony Pictures has been successful in various entertainment genres, especially in the highly lucrative gaming and sports segments.
 

What will the financials of the combined entity look like?

Here is a quick comparison of the sum of parts of the combined entity.

A quick look at the above date is sufficient to tell you that while Zee does score on revenues, it is Sony that scores on net profits, margins and in cash stash. That is what has given the advantage to Sony in the merger deal.

What role will Punit Goenka play in the merged entity?

As per the term sheet, Punit Goenka (son of Subhash Chandra) will continue as managing director and CEO of the merged entity for 5 years. In addition, Subhash Chandra family will have the leeway to increase its stake from 4% to 20% in line within extant rules. The challenge will be that INVESCO Fund and OFI Global China Fund had objected to the continuation of Punit Goenka as the CEO of Zee. They hold a combined 18% in Zee and their vote will be critical for the deal. That would be the next part of this emerging story.